Perhaps the fastest growing new “wealth-management” tool in the US is the reverse mortgage. The Federal Housing Administration insured 76, 351 such mortgages in 2006 compared with 43,131 in 2005. Industry officials expect around 120,000 reverse mortgages to be signed in 2007. In 1990, only 150 reverse mortgages were arranged. Traditional mortgages were the crucial means whereby millions of American families changed, especially after World War II, from tenants to home owners. True homeownership was/is the physical manifestation of the American Dream. Today’s reverse mortgages are a new means for liquidating that dream. They would better be described as “wealth-transfer” than “wealth-management” tools.

In traditional mortgages, home buyers pay lenders principal plus interest over many years to build up their home equity, to become genuine owners. In reverse mortgages, people who already own their homes borrow from lenders (receiving lump sums and/or monthly payments and/or lines of credit); in return, the lenders then acquire rising equity in those homes. Eventually the borrowers or their heirs must sell the home to repay the principal and accumulated interest. Tens of thousands of Americans aged 62 (the legally mandated minimum age for eligibility) or more are now receiving monthly reverse mortgage payments. They will get them for some or all of the rest of their lives. In this way, they can supplement the inadequate social security and often modest pension or investment income they must depend upon in retirement.

FULL from R. Wolfe at GlobalMacroScope

Posted by stan in Analysis